Russia's accession to the WTO creates incentives and timetables

The negotiations on Russia's accesion to the WTO started in 1993. For more information click on the image. Source: Niyaz Karimov 

Russia finally looks set to conclude its WTO entry negotiations, which began in June 1993, and gain admittance as a full member at the WTO Council meeting in December. Membership, while not offering any quick fix to the generally poor business environment or the high level of investor skepticism toward investment risk in Russia, will nevertheless be a very important step in the government’s efforts to force industries to become more efficient and to attract larger volumes of foreign and domestic-sourced investment capital.

WTO membership will have no immediate impact either on economic growth, the day-to-day operations of Russia's corporations or the risk premium investors apply to investment in the country. But membership will establish a powerful catalyst for a more serious approach to economic reform and industrial efficiency. As the benefits of those changes materialize, sustainable incremental economic growth may reach between 1 percent and 3 percent annually (according to the World Bank), while a gradual reduction in the risk premium will significantly cut the discount at which Russian equities have consistently traded against global market peers.

Membership will therefore create a framework for the next government’s agenda to create greater efficiency and diversification in the economy, just as World Cup 2018 will provide a timetable for improvements in key parts of the nation’s infrastructure. Such timelines and external pressures can, of course, be ignored or missed. That is something investors will only find out over the next few years. But the greater government support for WTO membership this year, after more than 17 years of indifference, does at least confirm that the long period of domestic preparation is at an end, and now it is time for openness and investment.

European companies are initially better placed to benefit from Russia’s WTO entry. Trade with the EU dominates Russia’s external trade, and industry relationships have been more integrated for longer. Opportunities for U.S. companies will be constrained because of the Jackson-Vanik amendment, but because the terms of that amendment are specifically in violation of the terms of WTO membership, Russia will have to be removed from the provisions very quickly once it has been admitted to the global trade organization. For all the political blustering in the U.S. Congress, Jackson-Vanik will go almost by default given Russia’s entry to the WTO. Otherwise, U.S. companies would lose out.

Economic sector specifics

Each of our sector analysts has looked at the potential impact of WTO entry on their sectors. The conclusion is the same in almost all cases: There will not be any immediate change, and/or the industry has already adopted international best practices and is in the process of changing to meet greater international competition, both at home and abroad. But, of course, membership will keep the pressure for change and set a definite timeline.

In terms of big-picture changes:

Consumer goods: Domestic producers will face greater competition from cheaper imports. Prime Minister Vladimir Putin has already singled out this sector for protection and measures to help it become more efficient.

Monopolies: WTO membership will require greater liberalization on the domestic energy market and an end to what are perceived as state subsidies in the gas sector. In effect, this should mean a more competitive domestic gas market, albeit with prices moving closer to the net export price, and greater access for independent producers. It should also mean an end to Gazprom's export monopoly. But none of this is new or unexpected, and investors are already largely factoring in these changes to their stock views.

Manufacturing: Expect a lengthy period of transition before companies in the manufacturing sector – across the board – face competition from imports. Putin has made that very clear on a number of occasions.

Exporters: These will face fewer export obstacles in terms of import tariffs and quotas (which are currently mainly affecting the steelmakers). These tariffs and quotas will also only be phased out gradually, rather than overnight with membership.

The experience of other countries in the WTO is that, far from negatively impacting domestic industry as some critics claimed, WTO membership has led to accelerated development, as local companies have had no choice but to raise their game to compete with established international operators.

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